Behavioral economics tips for home sellers: How to price a house

Anchoring is one of the most common human biases. As an example (from Nudge), write down your phone number and add two hundred. Now answer when you think the Hun sacked Europe? In surveys, people’s answers differ by a few hundred years depending on whether they have a low or a high anchor.

Marketers have long been curious about how different prices affect customers’ ideas of a product’s value. In the February issue of Psychological Science, marketing professor Chris Janiszewski and research assistant Dan Uy of the University of Florida tackled the age old question of whether people are really fooled – or at least subconsciously nudged – by a price tag than ends with quirky .95 instead of a nice, round, even .00.

For the paper (which is unfortunately subscriber-only), they put together a laboratory experiment involving three groups of potential buyers and a plasma television. Each buyer was told one of three retail prices: 1) $4,988; 2) $5,000; 3) $5,012. Janiszewski and Uy then asked the buyers to estimate the television’s wholesale price. Those with the round $5,000 retail price tag consistently guessed a lower wholesale price than those with the quirky retail prices. In other words, the quirky price anchor was stickier than the round price anchor. People stayed closer to it. (People who started with the $5,000 retail price were also more likely to guess the wholesale price was a round number.)

The authors argue that this result is the effect of anchoring on small increments (like $1) versus larger ones (like $100). Similarly, someone anchored on a price of $29.95 will be more likely to think in terms of coins than one anchored on a price of $30. As a result, they will name a wholesale price closer to $29.95.

Moving into the real world of real estate, Janiszewski and Uy collected five years of home sales in Alachua County, Florida, and compared the list prices and actual sale prices of homes, which fell between $600 and $2 million. Controlling for home price and excluding homes with $1 or $10 price endings (which usually mean foreclosures), they found that sellers who listed their homes more precisely walked away with a final amount closer to their asking price. People who listed homes with hundred dollar endings got closer offers than those who listed homes with thousand dollar endings, who got closer offers than those with ten thousand dollar endings. The precise price seemed to impose an arbitrarily higher floor on the negotiation process.

A final important caveat: the authors excluded homes that sold at or above the listing price, saying that these sales reflected a “bidding war,” which is not a common feature of most routine durable consumer good purchases. Unfortunately, the exemption dropped about half the listings in the sample. It’s not clear whether home price anchoring has a symmetrical or asymmetrical effect. Do precisely priced homes fluctuate between a narrower range – low and high – than imprecisely priced homes. For the moment, Janiszewski and Uy’s study cannot say.

4 Responses to “Behavioral economics tips for home sellers: How to price a house”

  1. Curtis Seltzer Says:

    I write a weekly column, Country Real Estate, which goes to about 400 newspapers and online venues. The columns are posted on my website at http://www.curtis-seltzer.com.
    I’m working on a column this week — Wednesday p.m. deadline — about how to price land in an overvalued market. Part of pricing is, of course, a matter of how much a seller needs to get to pay various obligations–such as mortgage, closing costs, taxes, etc. Usually, an asking price is based on comps–both recent sales and those idling on the market. Comps in a declining market probably overvalue the worth of the property being valued. True value is what a buyer pays, which can’t be predicted until the process starts.

    Rural land, unlike urban/suburban residential real estate, has in most areas not seen a 25% drop in asking price during the past year or so. Prices are still about where they were, but they’re not moving very quickly. I attribute this mostly to pricing of rural land based on HBU value not intrinsic worth as timberland, or crop land, etc. HBU prices it as second-home land.

    If a seller needs to sell now in this market, what do you suggest? Price initially at 15% below appraisal value? More; less?

    Yrs.

    Curtis Seltzer, Ph.D.
    Blue Grass, VA 24413
    540-474-3297
    curtisseltzer@htcnet.org

  2. Lone Ranger Says:

    Maybe I’m perverse, but for me the prices ending in “…9.95″ have the opposite effect from what the article describes. I see that kind of price so often that I assume it’s a marketing gimmick, that the real value of the product is a few pennies worth of lead-contaminated materials and Chinese slave labor.

    Call me a cynic, but that’s the way I see that kind of price.

    I also see housing prices in the mid to upper six figures (or higher) as entirely made up prices, bolstered by human vanity. Vanity will be one of the first things to go in a deflationary depression.

  3. Homemaker Barbi / Danelle Ice Says:

    Interesting points about the effect anchoring has on the mind when talking about price points. Like what Lone Ranger said about the large prices being “vanity” prices.

    Danelle Ice / Homemaker Barbi

  4. Darin Persinger Says:

    the key to “pricing the home” is to get traffic to the home. The real estate agent and the home seller will do the negotiating. For most real estate agents they shoud price homes at solid numbers because of the way their MLS and website home searches work. For example lets say a buyer is looking for home around $300,000-$350,000. If I priced my home at $299,910 I just missed out on that potentional buyer. That could be a huge segment of the market.

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